Starbucks has over the years expanded into 55 different countries and territories across the world, with upwards of 8033 and 8892 direct and franchised outlets manned by upwards of 149,000 employees (MarketLine, 2011, P. 4). The company sternly controls and licenses franchises across the world, stores that sell not only its espresso coffee, but tea, beverages and baked foods. With a market administratively divided into the United States, Internal, Global Consumer Markets and other regions, Starbucks major products include VIA Ready Brew, Starbucks, Tazo Tea and Seattle’s Best Coffee. It posted annual revenues of more than $11,701.9 million and $1,327 million in annual revenues and operating profits in 2011, as well as $1,728 in operating profits (MarketLine, 2011, P. 15). The expansion strategy that began in Seattle has now taken the company to China, India, Brazil and other countries where it has successfully launched operations.
SWOT Analysis
Strengths
Weaknesses
Extensive resources and huge Research and development expenditure
Considerable brand recognition and value
Strong operating and financial performance
Effective use of technology
Successful foreign investments
Differentiated products
Market Presence (Krishnan, 2005, P. 163)
Foreign Direct Investments model
Cultural and legal barriers to foreign expansions (Swayne, Duncan, & Ginter, 2006, 162)
Intense competition from other layers
Opportunities
Threats
International Expansion
Market diversification
Targeting youthful generations
Rising coffee beans’ prices
High costs of manpower (Siddiqui, 2005, P. 14)
Too much technology hurts in-store demand
Need for Expansion Abroad
The company’s model within the United States has proven extremely successful, largely of the equally successful products. The Starbucks experience clearly expanded easily and fast enough within the country, driven by the growth in popularity of the espresso-style coffee and coffee house experience (Carney, Gedajlovic, Heugens, Essen, & Oosterhout, 2011, P. 241). However, the US market grew very competitive quickly, with companies including Dunkin Donuts, McDonald’s, Caribou Coffee Company, Peet’s Coffee and Tea etc, which have reduced the Starbuck’s profit margins and market share, especially because the company thrives on extracting premium prices for its products. Expansion into other markets abroad was necessary in order to keep the company’s growth strategy. Given the fact that Starbucks is heavily reliant on a differentiated product, expansion abroad required that it remained authentic to its premium products. Services are difficult to replicate, which is why extensive training and reliance on US employees was crucial to the success of this strategy (Sorce, 2002, P. 152). Without it, the Starbucks’ brand would have dissipated in the face of new competition leading to the collapse.
Franchising and Fully Owned Subsidiaries
In addition, licensing of the Starbucks’ format to the rest of the world ignored the massive influence of culture, legal and regulatory frameworks in the foreign markets, local tastes and other factors (Ardichvili, 2008, P. 162). These factors influence everything from the organizational structure, culture, relationships, teamwork, knowledge management and the consumer demand Carney, Gedajlovic, Heugens, Essen, & Oosterhout, 2011, P. 82). In Japan for instance, organizations including Sazaby Inc have horizontal organizational structure because of the nature of the Japanese culture, while long-term employment and ownership are better appreciated than any other compensation structure. Effectively, while giving share options to Japanese and other foreign workers is critical, exporting the Starbucks model as it was a flawed strategy that would in the years to come be difficult to implement (Yip & Hult, 2011, P. 64).
Training of expatriate employees and establishment of firms is extremely costly and time consuming for the resources that the company, and has at the moment, which makes it difficult to finance the global expansion strategy Carney, Gedajlovic, Heugens, Essen, & Oosterhout, 2011, P. 37). With regard to regulation, China for instance has laws that necessitate that foreign direct investments must have a considerable proportion of local ownership, effectively making it even more difficult to “export Starbucks” (Van Fleet, 2008, P. 47). With time, franchising has become extremely practical and behind the rapid growth of the company abroad. Reliance on the franchisers’ resources allowed the company’s expansion strategy less dependent on the limited capital that it had (Hill, 2010, 135). This is significant for vast countries such as China, India and Brazil, which have a collective population of over 3 billion people and a vast territory (Krishnan, 2005, P. 163). Fully-owned subsidiaries are practically impossible for any company, which makes it important for companies to leverage the potential franchising possibilities as a way to expand (Andreasen & Kotler, 2003, P. 84).
Local licensing/franchising allows not only facilitates expansion but crucially, builds into the Starbucks experience, the local culture, tastes, sensibilities and other factors that are crucial to succeed in those markets (D'Costa, 2011, P. 11). A balance between foreign expertise and local employees makes for a better formula of exporting Starbucks into the foreign markets. This model also markedly shortens the learning curves in the new markets (Thompson & Shah, 2011, P. 102). This is not least because Starbucks does actually buy into already successful businesses as against starting up new enterprises. This way, it can minimize the costs of establishment, employee recruitment and development, organizational culture and day-to-day running of the ventures abroad. This is against having a top-heavy organization that would have existed with the use of fully owned subsidiaries (MarketLine, 2011, P. 17).
However, the need for control over investments has been an important strategy for Starbucks. By the close of 2011 for instance, the company assumed full control of all its existing stores in China. The company realizes how lucrative the Chinese market is, in comparison to the stagnated markets back at home (Sorce, 2002, P. 16). This is easily the most important motivation for the company’s move to take full control of its investments in the most lucrative markets. The company closed up 1100 stores in the United states in 2011 alone, to facilitate the expansion into China. In addition, the company’s full control strategy has been in almost all cases in regard to already established franchises. This way, the company least concerns itself with the entry strategies and expenditure.
This strategy derives from the production lifecycle theory of FDI. According to this theory, the production cycle includes (i) innovation (ii) growth (iii) maturity and (iv) decline. Starbucks uses direct ownership at the innovation stage, but employs franchises to facilitate the growth stage (Siddiqui, 2005, 44). Once the investments reach the middle of the growth stage, which also presents the best prospects for growth in profitability, Starbucks takes them over to maximize its returns. This way, the company has successfully seen its investments through the growth and maturity stages of the production cycle Carney, Gedajlovic, Heugens, Essen, & Oosterhout, 2011, P. 26). In addition, its investments abroad after its offerings within the United States reached the maturity stage. Maturity resulted in the stagnation of demand, and thus to re-energize the company, it launched its foreign expansion, whereby the company starts the cycle from the growth stage over again (Gupta, Gulati, & Chauhan, 2010, P. 153).
Starbucks’ Strategic Alternatives
There is a certain need to expand into markets abroad, but using the right strategy to expand is crucial for the company’s success not just in those markets, but also for the company. The best model for the company to expand is four-pronged.
(i) To begin with, it can embark on the innovation strategy, which includes increasing research and development spending to develop new products and efficiency-increasing processes, introducing technology, targeting new markets especially the youthful population etc. This will expand its markets within the United States as well as other established markets (Yip & Hult, 2011, P. 47).
(ii) The expansion strategy should firstly use joint ventures to establish a presence in the new markets approach. This way, the company gives its partners abroad access to the trademarks, permits, patents, trademarks, technology etc to facilitate successful market entry (Schein, 2010, P. 77)
(iii) Once the foreign ventures consolidate their positions in the respective markets, then Starbucks should subsequently buy out their partners from in order to ensure full control of the investments (Bersin, 2010, 162)
Conclusion
Starbucks has enjoyed considerable expansion since its inception, but changes in the external environment have ensured that its prospects both at present and in the future are difficult. Investments into new products and technology is crucial to ensuring that the company remains competitive and grows. In addition, while the Starbucks model of FDI has been successful in the past, it also faces challenges that can only be resolved by using three-pronged strategy in expanding into the new markets (MarketLine, 2011, P. 11). Successful investments in are dependent on striking the right balance between joint ventures and fully owned subsidiaries, which in turn ensures that the company uses moderate resources to expand, without sacrificing profitability, margins and market shares.
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